Here are the most common 5 reasons why most traders lose money in the markets.
Too Soon To Trade
Trading real money in the markets before you’re ready can be very costly. Before you start trading, you should have back tested your strategy.
A trader’s foundation is built by first studying historical price action on charts to learn the basic behavioral patterns of markets at various stages. Studies can result in theories that can be used to develop and test strategies. Starting a business with no preparation almost guarantees failure.
There Is No Trading System.
A trader’s trading strategy must be expressed within the context of a trading system, which includes a watchlist, position sizing, and entry and exit signals.
A trader is gambler who does not have an edge, and random trades outside of the context of a complete trading system are just gambling. Trading is not about making predictions, having strong opinions, or being correct; it is a business that requires a complete system for execution and consistently taking trades with favourable risk/reward ratios.
There Is No Risk Management.
A trader will eventually face the risk of ruin if they do not manage risk through proper position sizing, stop losses, and limiting maximum risk exposure as the market moves against them or through a string of consecutive losing trades.
Risk management determines a trader’s long-term survival rate, even if they are on a winning streak. Manage risk if you want to survive long in market.
There Is No Backtesting
A trader should not trade with real money until they have demonstrated the viability of their strategy using charts, backtesting, or a simulator. What is the advantage? They should have a reason for their confidence in putting money at risk. Also, a successful part-time trader should not attempt to become a full-time trader.
The Incorrect Trading Psychology
Trading with the wrong mindset can be very costly, as big losses happen to big egos. Fear causes traders to ignore entry signals and to hold winners until their exit signal is activated. Greed drives traders to make far too large trades. Loss aversion causes traders to hold losing trades in the hope of breaking even.
The right trader mindset embraces uncertainty. They adheres to their system, and is aware of their positive expectation over a series of trades. The core of proper trading psychology is faith in their trading system and faith in themselves to follow it with discipline.
Here are 5 reasons why traders lose money. Solve these five trading problems, and your chances of long-term trading success increase.